Government told to adopt flexible policy to revive economy

JAKARTA (JP): The government should exempt selected banks from the legal lending limit to increase the availability of credits for the real sector and to revive sluggish business activities, a noted economist said on Monday.

Sri Mulyani Indrawati said the move was risky but could provide a breakthrough to lift the country out of the three-year economic crisis.

"If banks are too prudential, don't expect them to stimulate the economy," she said during a seminar on economic recovery organized by Harian Ekonomi Neraca daily

Sri described Indonesia's economy as being trapped in a "vicious circle" in which banks refrain from lending to the non- financial sector due to its ailing condition, which is in turn caused by the paucity of bank loans.

A breakthrough policy is needed to break out of the vicious circle, she said.

Banking was the sector most affected by the economic crisis that hit the country in 1997, largely due to its reckless lending activities.

In a bid to enforce prudential banking practices, the government raised banks' capital adequacy ratios (CAR) to four percent.

But, aside from fearing non-performing loans, the government's strict regulation on legal lending limit impeded banks' capabilities, Sri said.

She cited banks' legal lending limit as impairing the sector's recovery, saying that under current conditions the limit is too strict.

The legal lending limit, among other things, prevents banks from channeling loans worth more than 20 percent of their equity to one business group.

During the crisis, many banks had exceeded their lending limits, preventing them from channeling more loans to clients with dangerous financial situations.

As banks fail to lend, their earnings drop while interest payments to third party savings continue to rise.

This situation has caused many banks to suffer from a negative spread, where the cost of attracting public capital has exceeded the profit from reinvesting it.

"We need exemptions to break that circle," Sri said.

She said the government, for instance, should lower the legal lending limits to channel credits to selected companies.

"On one side, this might look like another form of power abuse as seen during the era of (former president) Soeharto, but on the other side, such an exemption is needed to break the circle," she explained.

She admitted that the policy would draw criticism from the public, but as long as the government could explain the reasons behind the policy and conduct it in a responsible manner, the public would accept it.

Another breakthrough policy that should be adopted by the government is to revise debt settlement agreements made by the country's indebted conglomerates with the Indonesian Bank Restructuring Agency (IBRA).

She admitted that the move would incite debtors' criticisms, but she noted that revising the deals would help IBRA achieve its assets disposal target of Rp 18.9 trillion (US$2.2 billion).

By achieving the target, IBRA will give investors a "very impressive" signal that economic reforms are working, she said. (bkm)